10/1 ARM vs. 30-year fixed: Which mortgage is right for you?

When deciding how to finance or refinance your home, it’s important to explore all of your options. That includes investigating the pros and cons of adjustable-rate mortgages and fixed-rate mortgages. But how do you decide which option is best for you? We consulted with an Alliant mortgage loan officer to put together some tips to help you out.

What is the difference between a 10/1 ARM vs. 30-year fixed mortgage?

A fixed-rate mortgage has the same interest rate from the time you take out the loan until you pay if off. With an ARM, or adjustable-rate mortgage, the interest rate is set for a period of time, and then may go up or down after that set period. For example, a 10/1 ARM indicates that the interest rate is fixed for 10 years, and then the interest rate will be adjusted annually after that.

Hearing that your interest rate could change after 10 years can sometimes make consumers feel uneasy, perhaps triggering memories of the 2008 housing crisis. (Though, it’s important to remember that ARM mortgages themselves didn’t cause the crisis; it was much more complex than that.) People also often forget about or don’t even know about 10/1 ARMs, and only think of 3/1 or 5/1 ARMs, which lock in rates for a much shorter time period. Additionally, the 30-year fixed mortgage is the “standard” that most home buyers are accustomed to hearing about; it’s the rate and product most often featured in advertisements.

Simply learning more about the benefits of a 10/1 ARM vs. a 30-year fixed mortgage can ease uncertainty and help you make a more informed decision when it’s time to buy a new home or refinance your current mortgage.

How to decide if a 10/1 ARM is right for you

Alliant Mortgage Loan Officer Nick Safis says when he works with people on a new mortgage or refinance mortgage, he wants to lay out all of their financing options. Often, he says, people will find that the 10/1 ARM is “the best of both worlds,” giving them a lower interest rate than a 30-year fixed but with more stability than a 5/1 ARM.

Safis also recommends that people ask a few questions to help them decide if a 10/1 ARM is right for them.

• Rather than asking, “How long am I going to live in this home?” instead ask yourself, “Realistically, how long am I going to have this mortgage?”
• A small percentage of home owners have the same mortgage for more than 10 years. So, ask your parents if they’ve ever had a mortgage for more than 10 years. And how many of your friends have had the same mortgage for more than 10 years before moving or refinancing? Their answers could surprise you.
• Finally, ask yourself how much money you could save with a 10/1 ARM vs. a 30-year fixed mortgage.

Use a mortgage payment calculator

Earlier this decade, mortgage interest rates were at all-time lows. If the last time you bought a new home was during that low interest period, a fixed-rate mortgage likely made the most sense.  However, interest rates have been on the rise over the last few years, so it’s a different market now. Safis says the average rate difference between a 10/1 ARM vs. 30-year fixed mortgage can be about 0.5%-0.75%.

For example, let’s say you’re buying a new home and the spread between the two rates is 0.5%. You’re choosing between a $300,000, 30-year fixed mortgage at 4.75% APR and a 10/1 ARM at 4.25% APR. Your monthly payment would be about $1,564 for the 30-year fixed and only $1,475 for the 10/1 ARM. While $90 a month might not look like much, that adds up to more than $10,000 of savings over 10 years. Multiply that by several moves in a lifetime, and you could be looking at thousands and thousands of dollars in savings.

An easy way to do the math and compare a 10/1 ARM and 30-year fixed is with a mortgage payment calculator. Just plug in your loan amount, interest rate and term to get an estimate on your monthly mortgage payment with principal and interest.

You might also be able to save money on loan origination fees and avoid having to pay for private mortgage insurance (PMI) with a 10/1 ARM vs. a 30-year fixed mortgage. Be sure to ask your loan officer about those options as well.

Planning for the future

Compared to a generation or two ago, people are moving – and refinancing – much more often, with folks staying in their homes for an average of only 8 years before moving again. Whether it’s due to lifestage changes or switching jobs, people are moving – and refinancing – much more often than they did in the past.

Whether you decide to go with a 10/1 ARM or 30-year fixed mortgage, Safis says it’s important to establish and keep an ongoing relationship with your mortgage loan officer. They will keep an eye on the market and let you know when and if it makes sense to refinance. If rates go down in a couple years, for example, they might suggest refinancing from your current 10/1 ARM to a fixed-rate mortgage. Ultimately, Safis says, your mortgage loan officer wants to help educate you and save you money so you can reach your financial goals.

Maggie Tomasek is the marketing manager of special projects at Alliant. She began her career as a journalist for newspapers in Utica, N.Y., Des Moines and Cincinnati before moving to Chicago in 2009. Maggie is an eight-time Chicago Marathon finisher and a lifelong creative writer with a passion for comedy. Her mom instilled in her a great sense of fiscal responsibility, and her big sister told her to throw that responsibility out the window every once in a while in the name of life experience. So far, that combination of financial advice has worked out pretty well for her.